Forex Pages 42 90

9.
42 STRATEGIC FINANCIAL MANAGEMENT
equities with the proportion of the two components depending on the attractiveness of prices. In
foreign exchange exposure terms, hedged positions are similar to bonds (known costs or yields)
and unhedged ones to equities (uncertain returns).
14.3 High Risk: Low Reward
Perhaps the worst strategy is to leave all exposures unhedged. The risk of destabilization of cash
flows is very high. The merit is zero investment of managerial time or effort.
14.4 High Risk: High Reward
This strategy involves active trading in the currency market through continuous cancellations and
re-bookings of forward contracts. With exchange controls relaxed in India in recent times, a few of
the larger companies are adopting this strategy. In effect, this requires the trading function to
become a profit centre. This strategy, if it has to be adopted, should be done in full consciousness
of the risks.
15. CONCLUSION
Thus, on account of increased globalization of financial markets, risk management has gained
more importance. The benefits of the increased flow of capital between nations include a better
international allocation of capital and greater opportunities to diversify risk. However, globalization
of investment has meant new risks from exchange rates, political actions and increased
interdependence on financial conditions of different countries.
All these factors- increase in exchange rate risk, growth in international trade, globalization of
financial markets, increase in the volatility of exchange rates and growth of multinational and
transnational corporations- combine to make it imperative for today’s financial managers to study
the factors behind the risks of international trade and investment, and the methods of reducing
these risks.
TEST YOUR KNOWLEDGE

Theoretical Questions
1. “Operations in foreign exchange market are exposed to a number of risks.” Discuss.
2. What do you mean by Nostro, Vostro and Loro Accounts?
Practical Questions
1. The price of a bond just before a year of maturity is $ 5,000. Its redemption value is $ 5,250
at the end of the said period. Interest is $ 350 p.a. The Dollar appreciates by 2% during the
said period. Calculate the rate of return.
2. ABN-Amro Bank, Amsterdam, wants to purchase ` 15 million against US$ for funding their
Nostro account with Canara Bank, New Delhi. Assuming the inter-bank, rates of US$ is `
© The Institute of Chartered Accountants of India

FOREIGN EXCHANGE EXPOSURE AND RISK MANAGEMENT 79.43
51.3625/3700, what would be the rate Canara Bank would quote to ABN-Amro Bank?
Further, if the deal is struck, what would be the equivalent US$ amount.
3. XYZ Bank, Amsterdam, wants to purchase ` 25 million against £ for funding their Nostro
account and they have credited LORO account with Bank of London, London.
Calculate the amount of £’s credited. Ongoing inter-bank rates are per $, ` 61.3625/3700 &
per £, $ 1.5260/70.
4. ABC Ltd. of UK has exported goods worth Can $ 5,00,000 receivable in 6 months. The
exporter wants to hedge the receipt in the forward market. The following information is
available:
Spot Exchange Rate Can $ 2.5/£
Interest Rate in UK 12%
Interest Rate In Canada 15%
The forward rates truly reflect the interest rates differential. Find out the gain/loss to UK
exporter if Can $ spot rates (i) declines 2%, (ii) gains 4% or (iii) remains unch anged over
next 6 months.
5. On April 3, 2016, a Bank quotes the following:
Spot exchange Rate (US $ 1) INR 66.2525 INR 67.5945
2 months’ swap points 70 90
3 months’ swap points 160 186
In a spot transaction, delivery is made after two days.
Assume spot date as April 5, 2016.
Assume 1 swap point = 0.0001,
You are required to:
(i) ascertain swap points for 2 months and 15 days. (For June 20, 2016),
(ii) determine foreign exchange rate for June 20, 2016, and
(iii) compute the annual rate of premium/discount of US$ on INR, on an average rate.
6. JKL Ltd., an Indian company has an export exposure of JPY 10,000,000 receivable August
31, 2014. Japanese Yen (JPY) is not directly quoted against Indian Rupee.
The current spot rates are:
INR/US $ = ` 62.22
JPY/US$ = JPY 102.34

9.44 STRATEGIC FINANCIAL MANAGEMENT
It is estimated that Japanese Yen will depreciate to 124 level and Indian Rupee to
depreciate against US $ to ` 65.
Forward rates for August 2014 are
INR/US $ = ` 66.50
Required:
(i) Calculate the expected loss, if the hedging is not done. How the position will change,
if the firm takes forward cover?
(ii) If the spot rates on August 31, 2014 are:
INR/US $= ` 66.25
Is the decision to take forward cover justified?
7. You sold Hong Kong Dollar 1,00,00,000 value spot to your customer at ` 5.70 & covered
yourself in London market on the same day, when the exchange rates were
US$ 1 = H.K.$ 7.5880 7.5920
Local inter bank market rates for US$ were
Spot US$ 1 = ` 42.70 42.85
Calculate cover rate and ascertain the profit or loss in the transaction. Ignore brokerage.
8. You, a foreign exchange dealer of your bank, are informed that your bank has sold a T.T.
on Copenhagen for Danish Kroner 10,00,000 at the rate of Danish Kroner 1 = ` 6.5150. You
are required to cover the transaction either in London or New York market. The rates on
that date are as under:
Mumbai-London ` 74.3000 ` 74.3200

Mumbai-New York ` 49.2500 ` 49.2625
London-Copenhagen DKK 11.4200 DKK 11.4350
New York-Copenhagen DKK 07.5670 DKK 07.5840
In which market will you cover the transaction, London or New York, and what will be the
exchange profit or loss on the transaction? Ignore brokerages.
9. On January 28, 2013 an importer customer requested a Bank to remit Singapore Dollar
(SGD) 2,500,000 under an irrevocable Letter of Credit (LC). However, due to unavoidable

factors, the Bank could effect the remittances only on February 4, 2013. The inter -bank
market rates were as follows:
January 28, 2013 February 4, 2013
US$ 1= ` 45.85/45.90 ` 45.91/45.97
GBP £ 1 = US$ 1.7840/1.7850 US$ 1.7765/1.7775
GBP £ 1 = SGD 3.1575/3.1590 SGD 3. 1380/3.1390
The Bank wishes to retain an exchange margin of 0.125%

Required:
How much does the customer stand to gain or lose due to the delay?
(Note: Calculate the rate in multiples of 0.0001)
10. Following are the details of cash inflows and outflows in foreign currency denominations of
MNP Co. an Indian export firm, which have no foreign subsidiaries:
Currency Inflow Outflow Spot rate Forward rate
US $ 4,00,00,000 2,00,00,000 48.01 48.82
French Franc (FFr) 2,00,00,000 80,00,000 7.45 8.12
U.K. £ 3,00,00,000 2,00,00,000 75.57 75.98
Japanese Yen 1,50,00,000 2,50,00,000 3.20 2.40
(i) Determine the net exposure of each foreign currency in terms of Rupees.
(ii) Are any of the exposure positions offsetting to some extent?
11. The following 2-way quotes appear in the foreign exchange market:
Spot 2-months forward
RS/US $ `46.00/`46.25 `47.00/`47.50
Required:
(i) How many US dollars should a firm sell to get ` 25 lakhs after 2 months?
(ii) How many Rupees is the firm required to pay to obtain US $ 2,00,000 in the spot
market?
(iii) Assume the firm has US $ 69,000 in current account earning no interest. ROI on
Rupee investment is 10% p.a. Should the firm encash the US $ now or 2 months
later?
12. Z Ltd. importing goods worth USD 2 million, requires 90 days to make the payment. The
overseas supplier has offered a 60 days interest free credit period and for additiona l credit
for 30 days an interest of 8% per annum.

The bankers of Z Ltd offer a 30 days loan at 10% per annum and their quote for foreign
exchange is as follows:
`
Spot 1 USD 56.50
60 days forward for 1 USD 57.10
90 days forward for 1 USD 57.50
You are required to evaluate the following options:

(i) Pay the supplier in 60 days, or
(ii) Avail the supplier's offer of 90 days credit.
13. Followings are the spot exchange rates quoted at three different forex markets:
USD/INR 48.30 in Mumbai
GBP/INR 77.52 in London
GBP/USD 1.6231 in New York
The arbitrageur has USD1,00,00,000. Assuming that there are no transaction costs, explain
whether there is any arbitrage gain possible from the quoted spot exchange rates.
14. The US dollar is selling in India at ` 55.50. If the interest rate for 6 months borrowing in
India is 10% per annum and the corresponding rate in USA is 4%.
(i) Do you expect that US dollar will be at a premium or at discount in the Indian Forex
Market?
(ii) What will be the expected 6-months forward rate for US dollar in India? and
(iii) What will be the rate of forward premium or discount?
15. In March, 2009, the Multinational Industries make the following assessment of dollar
rates per British pound to prevail as on 1.9.2009:
$/Pound Probability
1.60 0.15
1.70 0.20
1.80 0.25
1.90 0.20
2.00 0.20
(i) What is the expected spot rate for 1.9.2009?

(ii) If, as of March, 2009, the 6-month forward rate is $ 1.80, should the firm sell forward
its pound receivables due in September, 2009?
16. An importer customer of your bank wishes to book a forward contract with your bank on 3 rd
September for sale to him of SGD 5,00,000 to be delivered on 30 th October.
The spot rates on 3 rd September are USD 49.3700/3800 and USD/SGD 1.7058/68. The
swap points are:
USD /` USD/SGD
Spot/September 0300/0400 1st month forward 48/49
Spot/October 1100/1300 2nd month forward 96/97
Spot/November 1900/2200 3rd month forward 138/140
Spot/December 2700/3100
Spot/January 3500/4000
Calculate the rate to be quoted to the importer by assuming an exchange margin of

paisa.
17. A company operating in Japan has today effected sales to an Indian company, the payment
being due 3 months from the date of invoice. The invoice amount is 108 lakhs yen. At
today's spot rate, it is equivalent to ` 30 lakhs. It is anticipated that the exchange rate will
decline by 10% over the 3 months period and in order to protect the yen payments, the
importer proposes to take appropriate action in the foreign exchange market. The 3 months
forward rate is presently quoted as 3.3 yen per rupee. You are required to calculate the
expected loss and to show how it can be hedged by a forward contract.
18. ABC Co. have taken a 6 month loan from their foreign collaborators for US Dollars 2
millions. Interest payable on maturity is at LIBOR plus 1.0%. Current 6-month LIBOR is 2%.
Enquiries regarding exchange rates with their bank elicits the following information:
Spot USD 1 ` 48.5275
6 months forward ` 48.4575
(i) What would be their total commitment in Rupees, if they enter into a forward
contract?
(ii) Will you advise them to do so? Explain giving reasons.
19. Excel Exporters are holding an Export bill in United States Dollar (USD) 1,00,000 due 60
days hence. They are worried about the falling USD value which is currently at ` 45.60 per
USD. The concerned Export Consignment has been priced on an Exchange rate of ` 45.50
per USD. The Firm’s Bankers have quoted a 60-day forward rate of ` 45.20.

Calculate:
(i) Rate of discount quoted by the Bank
(ii) The probable loss of operating profit if the forward sale is agreed to.
20. In International Monetary Market an international forward bid for December, 15 on pound
sterling is $ 1.2816 at the same time that the price of IMM sterling future for delivery on
December, 15 is $ 1.2806. The contract size of pound sterling is £ 62,500. How could the
dealer use arbitrage in profit from this situation and how much profit is earned?
21. An Indian importer has to settle an import bill for $ 1,30,000. The exporter has given the
Indian exporter two options:
(i) Pay immediately without any interest charges.
(ii) Pay after three months with interest at 5 percent per annum.
The importer's bank charges 15 percent per annum on overdrafts. The exchange rates in
the market are as follows:
Spot rate (` /$) : 48.35 /48.36
3-Months forward rate (`/$) : 48.81 /48.83
The importer seeks your advice. Give your advice.
22. DEF Ltd. has imported goods to the extent of US$ 1 crore. The payment terms are 60 days
interest-free credit. For additional credit of 30 days, interest at the rate of 7.75% p.a. will be
charged.
The banker of DEF Ltd. has offered a 30 days loan at the rate of 9.5% p.a. Their quote for
the foreign exchange is as follows:
Spot rate INR/US$ 62.50
60 days forward rate INR/US$ 63.15
90 days forward rate INR/US$ 63.45
Which one of the following options would be better?
(i) Pay the supplier on 60th day and avail bank loan for 30 days.
(ii) Avail the supplier's offer of 90 days credit.
23. A company is considering hedging its foreign exchange risk. It has made a purchase on 1st
July, 2016 for which it has to make a payment of US$ 60,000 on December 31, 2016. The
present exchange rate is 1 US $ = ` 65. It can purchase forward 1 $ at ` 64. The company
will have to make an upfront premium @ 2% of the forward amount purchased. The cost of
funds to the company is 12% per annum.

In the following situations, compute the profit/loss the company will make if it hedges its
foreign exchange risk with the exchange rate on 31 st December, 2016 as:
(i) ` 68 per US $.
(ii) ` 62 per US $.
(iii) ` 70 per US $.
(iv) ` 65 per US $.
24. Following information relates to AKC Ltd. which manufactures some parts of an electronics
device which are exported to USA, Japan and Europe on 90 days credit terms.
Cost and Sales information:
Japan USA Europe
Variable cost per unit `225 `395 `510
Export sale price per unit Yen 650 US$10.23 Euro 11.99
Receipts from sale due in 90 Yen 78,00,000 US$1,02,300 Euro 95,920
days
Foreign exchange rate information:
Yen/` US$/` Euro/`
Spot market 2.417-2.437 0.0214-0.0217 0.0177-0.0180
3 months forward 2.397-2.427 0.0213-0.0216 0.0176-0.0178
3 months spot 2.423-2.459 0.02144-0.02156 0.0177-0.0179
Advise AKC Ltd. by calculating average contribution to sales ratio whether it should hedge
it’s foreign currency risk or not.
25. EFD Ltd. is an export business house. The company prepares invoice in customers'
currency. Its debtors of US$. 10,000,000 is due on April 1, 2015.
Market information as at January 1, 2015 is:
Exchange rates US$/INR Currency Futures US$/INR
Spot 0.016667 Contract size: ` 24,816,975
1-month forward 0.016529 1-month 0.016519
3-months forward 0.016129 3-month 0.016118
Initial Margin Interest rates in India
1-Month ` 17,500 6.5%
3-Months ` 22,500 7%

On April 1, 2015 the spot rate US$/INR is 0.016136 and currency future rate is 0.016134.
Which of the following methods would be most advantageous to EFD Ltd?
(i) Using forward contract
(ii) Using currency futures
(iii) Not hedging the currency risk
26. Spot rate 1 US $ = ` 48.0123
180 days Forward rate for 1 US $ = ` 48.8190
Annualised interest rate for 6 months – Rupee = 12%
Annualised interest rate for 6 months – US $ = 8%
Is there any arbitrage possibility? If yes how an arbitrageur can take advantage of the
situation, if he is willing to borrow ` 40,00,000 or US $83,312.
27. Given the following information:
Exchange rate – Canadian dollar 0.665 per DM (spot)
Canadian dollar 0.670 per DM (3 months)
Interest rates – DM 7% p.a.
Canadian Dollar – 9% p.a.
What operations would be carried out to take the possible arbitrage gains?
28. An Indian exporting firm, Rohit and Bros., would be covering itself against a likely
depreciation of pound sterling. The following data is given:
Receivables of Rohit and Bros : £500,000
Spot rate : ` 56.00/£
Payment date : 3-months
3 months interest rate : India : 12 per cent per annum
: UK : 5 per cent per annum
What should the exporter do?
29. An exporter is a UK based company. Invoice amount is $3,50,000. Credit period is three
months. Exchange rates in London are :
Spot Rate ($/£) 1.5865 – 1.5905
3-month Forward Rate ($/£) 1.6100 – 1.6140
Rates of interest in Money Market :

Deposit Loan
$ 7% 9%
£ 5% 8%
Compute and show how a money market hedge can be put in place. Compare and contrast
the outcome with a forward contract.
30. The rate of inflation in India is 8% per annum and in the U.S.A. it is 4%. The current spot
rate for USD in India is ` 46. What will be the expected rate after 1 year and after 4 years
applying the Purchasing Power Parity Theory.
31. On April 1, 3 months interest rate in the UK £ and US $ are 7.5% and 3.5% per annum
respectively. The UK £/US $ spot rate is 0.7570. What would be the forward rate for US $
for delivery on 30 th June?
32. An importer requests his bank to extend the forward contract for US$ 20,000 which is due
for maturity on 30 th October, 2010, for a further period of 3 months. He agrees to pay the
required margin money for such extension of the contract.
Contracted Rate – US$ 1= ` 42.32
The US Dollar quoted on 30-10-2010:-
Spot – 41.5000/41.5200
3 months’ Premium -0.87% /0.93%
Margin money for buying and selling rate is 0.075% and 0.20% respectively.
Compute:
(i) The cost to the importer in respect of the extension of the forward contract, and
(ii) The rate of new forward contract.
33. XYZ, an Indian firm, will need to pay JAPANESE YEN (JY) 5,00,000 on 30 th June. In order
to hedge the risk involved in foreign currency transaction, the firm is considering two
alternative methods i.e. forward market cover and currency option contract.
On 1st April, following quotations (JY/INR) are made available:
Spot 3 months forward
1.9516/1.9711. 1.9726./1.9923
The prices for forex currency option on purchase are as follows:
Strike Price JY 2.125
Call option (June) JY 0.047
Put option (June) JY 0.098

For excess or balance of JY covered, the firm would use forward rate as future spot rate.
You are required to recommend cheaper hedging alternative for XYZ.
34. ABC Technologic is expecting to receive a sum of US$ 4,00,000 after 3 months. The
company decided to go for future contract to hedge against the risk. The standard size of
future contract available in the market is $1000. As on date spot and futures $ contract are
quoting at ` 44.00 &` 45.00 respectively. Suppose after 3 months the company closes out
its position futures are quoting at ` 44.50 and spot rate is also quoting at ` 44.50. You are
required to calculate effective realization for the company while selling the receivable. Also
calculate how company has been benefitted by using the future option.
35. Gibralater Limited has imported 5000 bottles of shampoo at landed cost in Mumbai, of
US $ 20 each. The company has the choice for paying for the goods immediately or in 3
months’ time. It has a clean overdraft limited where 14% p.a. rate of interest is charged.
Calculate which of the following method would be cheaper to Gibralter Limited.
(i) Pay in 3 months’ time with interest @ 10% p.a. and cover risk forward for 3 months.
(ii) Settle now at a current spot rate and pay interest of the over draft for 3 months.
The rates are as follows:
Mumbai ` /$ spot : 60.25-60.55
3 months swap points : 35/25

36. An American firm is under obligation to pay interests of Can$ 1010000 and Can$ 705000 on
31st July and 30th September respectively. The Firm is risk averse and its policy is to hedge
the risks involved in all foreign currency transactions. The Finance Manager of the firm is
thinking of hedging the risk considering two methods i.e. fixed forward or option contracts.
It is now June 30. Following quotations regarding rates of exchange, US$ per Can$, from
the firm’s bank were obtained:
Spot 1 Month Forward 3 Months Forward
0.9284-0.9288 0.9301 0.9356
Price for a Can$ /US$ option on a U.S. stock exchange (cents per Can$, payable on
purchase of the option, contract size Can$ 50000) are as follows:
Strike Price Calls Puts
(US$/Can$) July Sept. July Sept.
0.93 1.56 2.56 0.88 1.75
0.94 1.02 NA NA NA
0.95 0.65 1.64 1.92 2.34

According to the suggestion of finance manager if options are to be used, one month option
should be bought at a strike price of 94 cents and three month option at a strike price of 95
cents and for the remainder uncovered by the options the firm would bear the risk itself. For
this, it would use forward rate as the best estimate of spot. Transaction costs are ignored.
Recommend, which of the above two methods would be appropriate for the America n
firm to hedge its foreign exchange risk on the two interest payments.
37. Zaz plc, a UK Company is in the process of negotiating an order amounting €2.8 million with
a large German retailer on 6 month’s credit. If successful, this will be first time for Zaz has
exported goods into the highly competitive German Market. The Zaz is considering following
3 alternatives for managing the transaction risk before the order is finalized.
(a) Mr. Peter the Marketing head has suggested that in order to remove trans action risk
completely Zaz should invoice the German firm in Sterling using the current €/£
average spot rate to calculate the invoice amount.
(b) Mr. Wilson, CE is doubtful about Mr. Peter’s proposal and suggested an alternative
of invoicing the German firm in € and using a forward exchange contract to hedge
the transaction risk.
(c) Ms. Karen, CFO is agreed with the proposal of Mr. Wilson to invoice the German first
in €, but she is of opinion that Zaz should use sufficient 6 month sterling further
contracts (to the nearest whole number) to hedge the transaction risk.
Following data is available
Spot Rate € 1.1960 - €1.1970/£
6 months forward points 0.60 – 0.55 Euro Cents.
6 month further contract is currently trading at € 1.1943/£
6 month future contract size is £62,500
After 6 month Spot rate and future rate € 1.1873/£
You are required to
(a) Calculate (to the nearest £) the £ receipt for Zaz plc, under each of 3 above
proposals.
(b) In your opinion which alternative you consider to be most appropriate.
38. Columbus Surgicals Inc. is based in US, has recently imported surgical raw materials from
the UK and has been invoiced for £ 480,000, payable in 3 months. It has also exported
surgical goods to India and France.
The Indian customer has been invoiced for £ 138,000, payable in 3 months, and the French
customer has been invoiced for € 590,000, payable in 4 months.

Current spot and forward rates are as follows:

£ / US$
Spot: 0.9830 – 0.9850
Three months forward: 0.9520 – 0.9545
US$ / €
Spot: 1.8890 – 1.8920
Four months forward: 1.9510 – 1.9540
Current money market rates are as follows:
UK: 10.0% – 12.0% p.a.
France: 14.0% – 16.0% p.a.
USA: 11.5% – 13.0% p.a.
You as Treasury Manager are required to show how the company can hedge its foreign
exchange exposure using Forward markets and Money markets hedge and suggest which the
best hedging technique is.
39. XYZ Ltd. a US firm will need £ 3,00,000 in 180 days. In this connection, the following
information is available:
Spot rate 1 £ = $ 2.00
180 days forward rate of £ as of today = $1.96
Interest rates are as follows:
U.K. US
180 days deposit rate 4.5% 5%
180 days borrowing rate 5% 5.5%
A call option on £ that expires in 180 days has an exercise price of $ 1.97 and a premium of
$ 0.04.
XYZ Ltd. has forecasted the spot rates 180 days hence as below:
Future rate Probability
$ 1.91 25%
$ 1.95 60%
$ 2.05 15%
Which of the following strategies would be most preferable to XYZ Ltd.?
(a) A forward contract;
(b) A money market hedge;

(c) An option contract;

(d) No hedging.
Show calculations in each case
40. A Ltd. of U.K. has imported some chemical worth of USD 3,64,897 from one of the U.S.
suppliers. The amount is payable in six months time. The relevant spot and forward rates
are:
Spot rate USD 1.5617-1.5673
6 months’ forward rate USD 1.5455 –1.5609
The borrowing rates in U.K. and U.S. are 7% and 6% respectively and the deposit rates are
5.5% and 4.5% respectively.
Currency options are available under which one option contract is for GBP 12,500. The
option premium for GBP at a strike price of USD 1.70/GBP is USD 0.037 (call option) and
USD 0.096 (put option) for 6 months period.
The company has 3 choices:
(i) Forward cover
(ii) Money market cover, and
(iii) Currency option
Which of the alternatives is preferable by the company?
41. Nitrogen Ltd, a UK company is in the process of negotiating an order amounting to €4 million
with a large German retailer on 6 months credit. If successful, this will be the first time that
Nitrogen Ltd has exported goods into the highly competitive German market. The following
three alternatives are being considered for managing the transaction risk before the order is
finalized.
(i) Invoice the German firm in Sterling using the current exchange rate to calculate the
invoice amount.
(ii) Alternative of invoicing the German firm in € and using a forward foreign exchange
contract to hedge the transaction risk.
(iii) Invoice the German first in € and use sufficient 6 months sterling future contracts (to
the nearly whole number) to hedge the transaction risk.
Following data is available:
Spot Rate € 1.1750 - €1.1770/£
6 months forward premium 0.55-0.60 Euro Cents

6 months future contract is currently trading at €1.1760/£

6 months future contract size is £62500
Spot rate and 6 months future rate €1.1785/£
Required:
(a) Calculate to the nearest £ the receipt for Nitrogen Ltd, under each of the three
proposals.
(b) In your opinion, which alternative would you consider to be the most appropriate and
the reason thereof.
42. Sun Ltd. is planning to import equipment from Japan at a cost of 3,400 lakh yen. The company
may avail loans at 18 percent per annum with quarterly rests with which it can import the
equipment. The company has also an offer from Osaka branch of an India based bank extending
credit of 180 days at 2 percent per annum against opening of an irrecoverable letter of credit.
Additional information:
Present exchange rate ` 100 = 340 yen
180 day’s forward rate ` 100 = 345 yen
Commission charges for letter of credit at 2 per cent per 12 months.
Advice the company whether the offer from the foreign branch should be accepted.
43. NP and Co. has imported goods for US $ 7,00,000. The amount is payable after three
months. The company has also exported goods for US $ 4,50,000 and this amount is
receivable in two months. For receivable amount a forward contract is already taken at `
48.90.
The market rates for Rupee and Dollar are as under:
Spot ` 48.50/70
Two months 25/30 points
Three months 40/45 points
The company wants to cover the risk and it has two options as under :
(A) To cover payables in the forward market and
(B) To lag the receivables by one month and cover the risk only for the net amount. No
interest for delaying the receivables is earned. Evaluate both the options if the cost
of Rupee Funds is 12%. Which option is preferable?
44. A customer with whom the Bank had entered into 3 months’ forward purchase contract for
Swiss Francs 10,000 at the rate of ` 27.25 comes to the bank after 2 months and requests
cancellation of the contract. On this date, the rates, prevailing, are:

Spot CHF 1 = ` 27.30 27.35

One month forward ` 27.45 27.52
What is the loss/gain to the customer on cancellation?
45. A bank enters into a forward purchase TT covering an export bill for Swiss Francs 1,00,000
at ` 32.4000 due 25 th April and covered itself for same delivery in the local inter bank
market at ` 32.4200. However, on 25 th March, exporter sought for cancellation of the
contract as the tenor of the bill is changed.
In Singapore market, Swiss Francs were quoted against dollars as under:
Spot USD 1 = Sw. Fcs. 1.5076/1.5120
One month forward 1.5150/ 1.5160
Two months forward 1.5250 / 1.5270
Three months forward 1.5415/ 1.5445
and in the interbank market US dollars were quoted as under:
Spot USD 1 = ` 49.4302/.4455
Spot / April 4100/.4200
Spot/May .4300/.4400
Spot/June .4500/.4600
Calculate the cancellation charges, payable by the customer if exchange margin required by
the bank is 0.10% on buying and selling.
46. Your forex dealer had entered into a cross currency deal and had sold US $ 10,00,000
against EURO at US $ 1 = EURO 1.4400 for spot delivery.
However, later during the day, the market became volatile and the dealer in compliance
with his management’s guidelines had to square – up the position when the quotations
were:
Spot US $ 1 INR 31.4300/4500
1 month margin 25/20
2 months margin 45/35
Spot US $ 1 EURO 1.4400/4450
1 month forward 1.4425/4490
2 months forward 1.4460/4530
What will be the gain or loss in the transaction?

47. You have following quotes from Bank A and Bank B:
Bank A Bank B
SPOT USD/CHF 1.4650/55 USD/CHF 1.4653/60
3 months 5/10
6 months 10/15
SPOT GBP/USD 1.7645/60 GBP/USD 1.7640/50
3 months 25/20
6 months 35/25
Calculate :
(i) How much minimum CHF amount you have to pay for 1 Million GBP spot?
(ii) Considering the quotes from Bank A only, for GBP/CHF what are the Implied Swap
points for Spot over 3 months?
48. M/s Omega Electronics Ltd. exports air conditioners to Germany by importing all the
components from Singapore. The company is exporting 2,400 units at a price of Euro 500
per unit. The cost of imported components is S$ 800 per unit. The fixed cost and other
variables cost per unit are ` 1,000 and ` 1,500 respectively. The cash flows in Foreign
currencies are due in six months. The current exchange rates are as follows:
`/Euro 51.50/55
`/S$ 27.20/25
After six months the exchange rates turn out as follows:
`/Euro 52.00/05
`/S$ 27.70/75
(A) You are required to calculate loss/gain due to transaction exposure.
(B) Based on the following additional information calculate the loss/gain due to
transaction and operating exposure if the contracted price of air conditioners is
` 25,000 :
(i) the current exchange rate changes to
`/Euro 51.75/80
`/S$ 27.10/15
(ii) Price elasticity of demand is estimated to be 1.5
(iii) Payments and receipts are to be settled at the end of six months.

49. Your bank’s London office has surplus funds to the extent of USD 5,00, 000/- for a period of
3 months. The cost of the funds to the bank is 4% p.a. It proposes to invest these funds in
London, New York or Frankfurt and obtain the best yield, without any exchange risk to the
bank. The following rates of interest are available at the three centres for investment of
domestic funds there at for a period of 3 months.
London 5 % p.a.
New York 8% p.a.
Frankfurt 3% p.a.
The market rates in London for US dollars and Euro are as under:
London on New York
Spot 1.5350/90
1 month 15/18
2 month 30/35
3 months 80/85
London on Frankfurt
Spot 1.8260/90
1 month 60/55
2 month 95/90
3 month 145/140
At which centre, will be investment be made & what will be the net gain (to the nearest
pound) to the bank on the invested funds?
50. Drilldip Inc. a US based company has a won a contract in India for drilling oil field. The
project will require an initial investment of ` 500 crore. The oil field along with equipments
will be sold to Indian Government for ` 740 crore in one year time. Since the Indian
Government will pay for the amount in Indian Rupee (`) the company is worried about
exposure due exchange rate volatility.
You are required to:
(a) Construct a swap that will help the Drilldip to reduce the exchange rate risk.
(b) Assuming that Indian Government offers a swap at spot rate which is 1US$ = ` 50 in
one year, then should the company should opt for this option or should it just do
nothing. The spot rate after one year is expected to be 1US$ = ` 54. Further you
may also assume that the Drilldip can also take a US$ loan at 8% p.a.

51. You as a dealer in foreign exchange have the following position in Swiss Francs on
31st October, 2009:
Swiss Francs
Balance in the Nostro A/c Credit 1,00,000
Opening Position Overbought 50,000
Purchased a bill on Zurich 80,000
Sold forward TT 60,000
Forward purchase contract cancelled 30,000
Remitted by TT 75,000
Draft on Zurich cancelled 30,000
What steps would you take, if you are required to maintain a credit Balance of Swiss Francs
30,000 in the Nostro A/c and keep as overbought position on Swiss Francs 10,000?
ANSWERS/ SOLUTIONS
Answers to Theoretical Questions
1. Please refer paragraph 8.1
2. Please refer paragraph 2.
Answers to the Practical Questions
1. Here we can assume two cases (i) If investor is US investor then there will be no impact of
appreciation in $. (ii) If investor is from any other nation other than US say Indian then there
will be impact of $ appreciation on his returns.
First we shall compute return on bond which will be common for both investors.
(Price at end - Price at begining)+ Interest
Return =
Price at begining
(5250 − 5000) + 350
=
5000
250 + 350
= =0.12 say 12%
5000
(i) For US investor the return shall be 12% and there will be no impact of appreciation in $.
(ii) If $ appreciate by 2% then return for non-US investor shall be:
Return x 1.02 = 0.12 x 1.02=0.1224 i.e. 12.24%
Alternatively, it can also be considered that $ appreciation will be applicable to the amount
of principal as well. The answer therefore could also be

(1+0.12)(1+0.02) -1 =1.12X1.02 - 1 = 0.1424 i.e. 14.24%

2. Here Canara Bank shall buy US$ and credit ` to Vostro account of ABN-Amro Bank.
Canara Bank’s buying rate will be based on the Inter-bank Buying Rate (as this is the rate
at which Canara Bank can sell US$ in the Interbank market)
Accordingly, the Interbank Buying Rate of US$ will be ` 51.3625 (lower of two) i.e. (1/51.3625) =
$ 0.01947/`
Equivalent of US$ for ` 15 million at this rate will be
15,000,000
= = US$ 2,92,041.86
51.3625
or = 15,000,000 x $ 0.01947 = US$ 2,92,050
3. To purchase Rupee, XYZ Bank shall first sell £ and purchase $ and then sell $ to purchase
Rupee. Accordingly, following rate shall be used:
(£/`)ask
The available rates are as follows:
($/£)bid = $1.5260
($/£)ask = $1.5270
(`/$)bid = ` 61.3625
(`/$)ask = ` 61.3700
From above available rates we can compute required rate as follows:
(£/`)ask = (£/$)ask x ($/`)ask
= (1/1.5260) x (1/61.3625)
= £ 0.01068 or £ 0.0107
Thus, amount of £ to be credited
= ` 25,000,000 x £ 0.0107
= £ 267,500
2.50 (1 + 0.075)
4. Forward Rate = = Can$ 2.535/£
(1 + 0.060)
(i) If spot rate decline by 2%

Spot Rate = Can$ 2.50 x 1.02 = Can$ 2.55/£
£
£ receipt as per Forward Rate (Can $ 5,00,000/ Can$ 2.535) 1,97,239

£ receipt as per Spot Rate (Can $ 5,00,000/ Can$ 2.55) 1,96,078

Gain due to forward contract 1,161
(ii) If spot rate gains by 4%
Spot Rate = Can$ 2.50 x 0.96 = Can$ 2.40/£
£
Loss due to forward contract 11,094
(iii) If spot rate remains unchanged
£
Loss due to forward contract 2,761
5. (i) Swap Points for 2 months and 15 days

Bid Ask
Swap Points for 2 months (a) 70 90
Swap Points for 3 months (b) 160 186
Swap Points for 30 days (c) = (b) – (a) 90 96
Swap Points for 15 days (d) = (c)/2 45 48
Swap Points for 2 months & 15 days (e) = (a) + (d) 115 138
(ii) Foreign Exchange Rates for 20 th June 2016
Bid Ask
Spot Rate (a) 66.2525 67.5945
Swap Points for 2 months & 15 days (b) 0.0115 0.0138
66.2640 67.6083

(iii) Annual Rate of Premium
Bid Ask
Spot Rate (a) 66.2525 67.5945
Foreign Exchange Rates for 66.2640 67.6083
20 th June 2016 (b)
Premium (c) 0.0115 0.0138
Total (d) = (a) + (b) 132.5165 135.2028
Average (d) / 2 66.2583 67.6014
Premium 0.0115 12 0.0138 12
 × 100  × 100
66.2583 2.5 67.6014 2.5
= 0.0833% = 0.0980%
6. Since the direct quote for ¥ and ` is not available it will be calculated by cross exchange
rate as follows:
`/$ x $/¥ = `/¥
62.22/102.34 = 0.6080
Spot rate on date of export 1¥ = ` 0.6080
Expected Rate of ¥ for August 2014 = ` 0.5242 (` 65/¥124)
Forward Rate of ¥ for August 2014 = ` 0.6026 (` 66.50/¥110.35)
(i) Calculation of expected loss without hedging
Value of export at the time of export (` 0.6080 x ¥10,000,000) ` 60,80,000

Estimated payment to be received on Aug. 2014 (` 0.5242 x ` 52,42,000
¥10,000,000)
Loss ` 8,38,000
Hedging of loss under Forward Cover
` Value of export at the time of export (` 0.6080 x ` 60,80,000

¥10,000,000)
Payment to be received under Forward Cover (` 0.6026 x ` 60,26,000
¥10,000,000)
Loss ` 54,000
By taking forward cover loss is reduced to ` 54,000.

(ii) Actual Rate of ¥ on August 2014 = ` 0.5977 (` 66.25/¥110.85)
Value of export at the time of export (` 0.6080 x ¥10,000,000) ` 60,80,000

Estimated payment to be received on Aug. 2014 (` 0.5977 x ` 59,77,000
¥10,000,000)
Loss ` 1,03,000
The decision to take forward cover is still justified.

7. The bank (Dealer) covers itself by buying from the market at market selling rate.
Rupee – Dollar selling rate = ` 42.85
Dollar – Hong Kong Dollar = HK $ 7.5880
Rupee – Hong Kong cross rate = ` 42.85 / 7.5880
= ` 5.6471
Profit / Loss to the Bank
Amount received from customer (1 crore  5.70) ` 5,70,00,000
Amount paid on cover deal (1 crore  5.6471) ` 5,64,71,000
Profit to Bank ` 5,29,000
8. Amount realized on selling Danish Kroner 10,00,000 at ` 6.5150 per Kroner = ` 65,15,000.
Cover at London:
Bank buys Danish Kroner at London at the market selling rate.
Pound sterling required for the purchase (DKK 10,00,000 ÷ DKK 11.4200) = GBP 87,565.67
Bank buys locally GBP 87,565.67 for the above purchase at the market selling rate of
` 74.3200.
The rupee cost will be = ` 65,07,88
Profit (` 65,15,000 - ` 65,07,881) = ` 7,119
Cover at New York:
Bank buys Kroners at New York at the market selling rate.
Dollars required for the purchase of Danish Kroner (DKK10,00,000 ÷ 7.5670) = USD
1,32,152.77
Bank buys locally USD 1,32,152.77 for the above purchase at the market selling rate of
` 49.2625.
The rupee cost will be = ` 65,10,176.
Profit (` 65,15,000 - ` 65,10,176) = ` 4,824

The transaction would be covered through London which gets the maximum profit of
` 7,119 or lower cover cost at London Market by (` 65,10,176 - ` 65,07,881) = ` 2,295
9. On January 28, 2013 the importer customer requested to remit SGD 25 lakhs.
To consider sell rate for the bank:
US $ = `45.90
Pound 1 = US$ 1.7850
Pound 1 = SGD 3.1575
` 45.90 * 1.7850
Therefore, SGD 1 =
SGD 3.1575
SGD 1 = `25.9482
Add: Exchange margin (0.125%) ` 0.0324
` 25.9806
On February 4, 2013 the rates are
US $ = ` 45.97
Pound 1 = US$ 1.7775
Pound 1 = SGD 3.1380
` 45.97 * 1.7775
Therefore, SGD 1 =
SGD 3.1380
SGD 1 = ` 26.0394
Add: Exchange margin (0.125%) ` 0.0325
` 26.0719
Hence, loss to the importer
= SGD 25,00,000 (`26.0719 – `25.9806)= `2,28,250
10. (i) Net exposure of each foreign currency in Rupees
Inflow Outflow Net Inflow Spread Net Exposure

(Millions) (Millions) (Millions) (Millions)
US$ 40 20 20 0.81 16.20
FFr 20 8 12 0.67 8.04
UK£ 30 20 10 0.41 4.10
Japan Yen 15 25 -10 -0.80 8.00
(ii) The exposure of Japanese yen position is being offset by a better forward rate

11. (i) US $ required to get ` 25 lakhs after 2 months at the Rate of ` 47/$
` 25,00,000
∴ = US $ 53191.489
` 47
(ii) ` required to get US$ 2,00,000 now at the rate of ` 46.25/$
 US $ 200,000 × ` 46.25 = ` 92,50,000
(iii) Encashing US $ 69000 Now Vs 2 month later
Proceed if we can encash in open mkt $ 69000 × `46 = ` 31,74,000
Opportunity gain
10 2
= 31,74,000   ` 52,900
100 12
Likely sum at end of 2 months 32,26,900
Proceeds if we can encash by forward rate :
$ 69000 × `47.00 32,43,000
It is better to encash the proceeds after 2 months and get opportunity gain.
12. (i) Pay the supplier in 60 days
If the payment is made to supplier in 60 days the ` 57.10

applicable forward rate for 1 USD
Payment Due USD 2,000,000
Outflow in Rupees (USD 2000000 × `57.10) `114,200,000
Add: Interest on loan for 30 days@10% p.a. ` 9,51,667
Total Outflow in ` `11,51,51,667
(ii) Availing supplier’s offer of 90 days credit
Amount Payable USD 2,000,000

Add: Interest on credit period for 30 days@8% p.a. USD 13,333
Total Outflow in USD USD 2,013,333
Applicable forward rate for 1 USD `57.50
Total Outflow in ` (USD 2,013,333 ×`57.50) `115,766,648
Alternative 1 is better as it entails lower cash outflow.

13. The arbitrageur can proceed as stated below to realize arbitrage gains.
(i) Buy ` from USD 10,000,000 At Mumbai 48.30 × 10,000,000 `483,000,000

` 483,000,000
(ii) Convert these ` to GBP at London ( ) GBP 6,230,650.155
` 77.52
(iii) Convert GBP to USD at New York GBP 6,230,650.155 × 1.6231 USD 10,112,968.26
There is net gain of USD 10,112968.26 less USD 10,000,000 i.e. USD 112,968.26
14. (i) Under the given circumstances, the USD is expected to quote at a premium in India
as the interest rate is higher in India.
(ii) Calculation of the forward rate:
1 + R h F1
=
1 + R f Eo
Where: Rh is home currency interest rate, R f is foreign currency interest rate, F 1 is
end of the period forward rate, and E o is the spot rate.
1 + ( 0.10/2 ) F1
Therefore =
1 + ( 0.04 / 2 ) 55.50
1 + 0.05 F1
=
1 + 0.02 55.50
1.05
or  55.50 = F1
1.02
58.275
or = F1
1.02
or F1 = `57.13
(iii) Rate of premium:
57.13 - 55.50 12
  100 = 5.87%
55.50 6
15. (i) Calculation of expected spot rate for September, 2009:
$ for £ Probability Expected $/£
(1) (2) (1) × (2) = (3)
1.60 0.15 0.24
1.70 0.20 0.34
1.80 0.25 0.45
1.90 0.20 0.38
2.00 0.20 0.40
1.00 EV = 1.81

Therefore, the expected spot value of $ for £ for September, 2009 would be $ 1.81.
(ii) If the six-month forward rate is $ 1.80, the expected profits of the firm can be
maximised by retaining its pounds receivable.
16.
USD/ ` on 3rd September 49.3800

Swap Point for October 0.1300
49.5100
Add: Exchange Margin 0.0500
49.5600
USD/ SGD on 3rd September 1.7058
Swap Point for 2 nd month Forward 0.0096
1.7154
Cross Rate for SGD/ ` of 30th October

USD/ ` selling rate = ` 49.5600
SGD/ ` buying rate = SGD 1.7154
SGD/ ` cross rate = ` 49.5600 / 1.7154 = ` 28.8912
17. Spot rate of ` 1 against yen = 108 lakhs yen/` 30 lakhs = 3.6 yen
3 months forward rate of Re. 1 against yen = 3.3 yen
Anticipated decline in Exchange rate = 10%.
Expected spot rate after 3 months = 3.6 yen – 10% of 3.6 = 3.6 yen – 0.36 yen = 3.24 yen
per rupee
` (in lakhs)
Present cost of 108 lakhs yen 30.00
Cost after 3 months: 108 lakhs yen/ 3.24 yen 33.33
Expected exchange loss 3.33
If the expected exchange rate risk is hedged by a Forward contract:
Present cost 30.00
Cost after 3 months if forward contract is taken 108 lakhs yen/ 3.3 yen 32.73
Expected loss 2.73

Suggestion: If the exchange rate risk is not covered with forward contract, the expected
exchange loss is ` 3.33 lakhs. This could be reduced to ` 2.73 lakhs if it is covered with
Forward contract. Hence, taking forward contract is suggested.
18. Firstly, the interest is calculated at 3% p.a. for 6 months. That is:
USD 20,00,000 × 3/100 × 6/12 = USD 30,000
From the forward points quoted, it is seen that the second figure is less than the first, this
means that the currency is quoted at a discount.
(i) The value of the total commitment in Indian rupees is calculated as below:
Principal Amount of loan USD 20,00,000

Add: Interest USD 30,000
Amount due USD 20,30,000
Spot rate ` 48.5275
Forward Points (6 months) (–) 0.0700
Forward Rate ` 48.4575
Value of Commitment ` 9,83,68,725
(ii) It is seen from the forward rates that the market expectation is that the dollar will
depreciate. If the firm's own expectation is that the dollar will depreciate more than
what the bank has quoted, it may be worthwhile not to cover forward and keep the
exposure open.
If the firm has no specific view regarding future dollar price movements, it would be better to
cover the exposure. This would freeze the total commitment and insulate the firm from
undue market fluctuations. In other words, it will be advisable to cut the losses at this point
of time.
Given the interest rate differentials and inflation rates between India and USA, it would be
unwise to expect continuous depreciation of the dollar. The US Dollar is a stronger currency
than the Indian Rupee based on past trends and it would be advisable to cover the
exposure.
19. (i) Rate of discount quoted by the bank
(45.20 - 45.60) × 365 × 100
= = 5.33%
45.60 × 60
(ii) Probable loss of operating profit:
(45.20 – 45.50)  1,00,000 = ` 30,000

20. Buy £ 62500 × 1.2806 = $ 80037.50

Sell £ 62500 × 1.2816 = $ 80100.00
Profit $ 62.50
Alternatively, if the market comes back together before December 15, the dealer could
unwind his position (by simultaneously buying £ 62,500 forward and selling a futures
contract. Both for delivery on December 15) and earn the same profit of $ 62.5.
21. If importer pays now, he will have to buy US$ in Spot Market by availing overdraft facility.
Accordingly, the outflow under this option will be
`
Amount required to purchase $130000[$130000X`48.36] 6286800
Add: Overdraft Interest for 3 months @15% p.a. 235755
6522555
If importer makes payment after 3 months then, he will have to pay interest for 3 months @
5% p.a. for 3 month along with the sum of import bill. Accordingly, he will have to buy $ in
forward market. The outflow under this option will be as follows:
$
Amount of Bill 130000
Add: Interest for 3 months @5% p.a. 1625
131625
Amount to be paid in Indian Rupee after 3 month under the forward purchase contract
` 6427249 (US$ 131625 X ` 48.83)
Since outflow of cash is least in (ii) option, it should be opted for.
22. (i) Pay the supplier in 60 days
If the payment is made to supplier in 60 days the applicable ` 63.15

forward rate for 1 USD
Payment Due USD 1 crore
Outflow in Rupees (USD 1 crore × ` 63.15) ` 63.15 crore
Add: Interest on loan for 30 days@9.5% p.a. ` 0.50 crore
Total Outflow in ` ` 63.65 crore

(ii) Availing supplier’s offer of 90 days credit
Amount Payable USD 1.00000 crore

Add: Interest on credit period for 30 days@7.75% p.a. USD 0.00646 crore
Total Outflow in USD USD 1.00646 crore
Applicable forward rate for 1 USD ` 63.45
Total Outflow in ` (USD 1.00646 crore ×` 63.45) ` 63.86 crore
Alternative 1 is better as it entails lower cash outflow.
23.
(`)
Present Exchange Rate `65 = 1 US$
If company purchases US$ 60,000 forward premium is
60000 × 64 × 2% 76,800
Interest on `76,800 for 6 months at 12% 4,608
Total hedging cost 81,408
If exchange rate is `68
Then gain (`68 – `64) for US$ 60,000 2,40,000
Less: Hedging cost 81,408
Net gain 1,58,592
If US$ = `62
Then loss (`64 – `62) for US$ 60,000 1,20,000
Add: Hedging Cost 81,408
Total Loss 2,01,408
If US$ = `70
Then Gain (`70 – `64) for US$ 60,000 3,60,000
Less: Hedging Cost 81,408
Total Gain 2,78,592
If US$ = `65
Then Gain (` 65 – ` 64) for US$ 60,000 60,000
Less: Hedging Cost 81,408
Net Loss 21,408

24. If foreign exchange risk is hedged
Total
(` )
Sum due Yen 78,00,000 US$1,02,300 Euro 95,920
Unit input price Yen 650 US$10.23 Euro 11.99
Unit sold 12000 10000 8000
Variable cost per unit `225/- `395/- `510/-
Variable cost `27,00,000 ` 39,50,000 ` 40,80,000 ` 1,07,30,000
Three months forward rate 2.427 0.0216 0.0178
for selling
Rupee value of receipts `32,13,844 ` 47,36,111 ` 53,88,764 ` 1,33,38,719
Contribution `5,13,844 ` 7,86,111 ` 13,08,764 ` 26,08,719
Average contribution to sale 19.56%
ratio
If risk is not hedged
Rupee value of receipt `31,72,021 ` 47,44,898 ` 53,58,659 ` 1,32,75,578
Total contribution ` 25,45,578
Average contribution to sale 19.17%
ratio
AKC Ltd. Is advised to hedge its foreign currency exchange risk.

25. Receipts using a forward contract = $10,000,000/0.016129 = ` 620,001,240
Receipts using currency futures
The number of contracts needed is ($10,000,000/0.016118)/24,816,975 = 25
Initial margin payable is 25 contracts x ` 22,500 = ` 5,62,500
On April 1,2015Close at 0.016134
Receipts = US$10,000,000/0.016136 = ` 619,732,276
Variation Margin =
[(0.016134 – 0.016118) x 25 x 24,816,975/-]/0.016136
OR (0.000016x 25 x 24,816,975)/.016136 = 9926.79/0.016136 = ` 615,195
Less: Interest Cost – ` 5,62,500x 0.07 x 3/12 = ` 9,844
Net Receipts ` 620,337,627

Receipts under different methods of hedging

Forward contract ` 620,001,240
Futures ` 620,337,627
No hedge (US$ 10,000,000/0.016136) ` 619,732,276
The most advantageous option would have been to hedge with futures.
26.
Spot Rate = `40,00,000 /US$83,312 = 48.0123

Forward Premium on US$ = [(48.8190 – 48.0123)/48.0123] x 12/6 x 100
= 3.36%
Interest rate differential = 12% - 8%
= 4%
Since the negative Interest rate differential is greater than forward premium there is a
possibility of arbitrage inflow into India.
The advantage of this situation can be taken in the following manner:
1. Borrow US$ 83,312 for 6 months
Amount to be repaid after 6 months
= US $ 83,312 (1+0.08 x 6/12) = US$86,644.48
2. Convert US$ 83,312 into Rupee and get the principal i.e. `40,00,000
Interest on Investments for 6 months – `40,00,000/- x 0.06 = `2,40,000/-
Total amount at the end of 6 months = `(40,00,000 + 2,40,000) = `42,40,000/-
Converting the same at the forward rate
= `42,40,000/ `48.8190= US$ 86,851.43
Hence the gain is US $ (86,851.43 – 86,644.48) = US$ 206.95 OR
`10,103 i.e., ($206.95 x `48.8190)
27. In this case, DM is at a premium against the Can$.

Premium = [(0.67 – 0.665) /0.665] x (12/3) x 100 = 3.01 per cent
Interest rate differential = 9% - 7% = 2 per cent.
Since the interest rate differential is smaller than the premium, it will be profitable to place
money in Deutschmarks the currency whose 3-months interest is lower.
The following operations are carried out:
(i) Borrow Can$ 1000 at 9 per cent for 3- months;

(ii) Change this sum into DM at the spot rate to obtain DM

= (1000/0.665) = 1503.76
(iii) Place DM 1503.76 in the money market for 3 months to obtain a sum of DM
Principal: 1503.76
Add: Interest @ 7% for 3 months = 26.32
Total 1530.08
(iv) Sell DM at 3-months forward to obtain Can$= (1530.08x0.67) = 1025.15
(v) Refund the debt taken in Can$ with the interest due on it, i.e.,
Can$
Principal 1000.00
Add: Interest @9% for 3 months 22.50
Total 1022.50
Net arbitrage gain = 1025.15 – 1022.50 = Can$ 2.65
28. The only thing lefts Rohit and Bros to cover the risk in the money market. The following
steps are required to be taken:
(i) Borrow pound sterling for 3- months. The borrowing has to be such that at the end of
three months, the amount becomes £ 500,000. Say, the amount borrowed is £ x.
Therefore
 3
x 1 + 0.05   = 500,000 or x = £493,827
 12 
(ii) Convert the borrowed sum into rupees at the spot rate. This gives: £493,827 × ` 56
= ` 27,654,312
(iii) The sum thus obtained is placed in the money market at 12 per cent to obtain at the
end of 3- months:
 3
S = ` 27,654,312 × 1 + 0.12   = ` 28,483,941
 12 
(iv) The sum of £500,000 received from the client at the end of 3- months is used to
refund the loan taken earlier.
From the calculations. It is clear that the money market operation has resulted into a
net gain of ` 483,941 (` 28,483,941 – ` 500,000 × 56).
If pound sterling has depreciated in the meantime. The gain would be even bigger.

29. Identify: Foreign currency is an asset. Amount $ 3,50,000.

Create: $ Liability.
Borrow: In $. The borrowing rate is 9% per annum or 2.25% per quarter.
Amount to be borrowed: 3,50,000 / 1.0225 = $ 3,42,298.29
Convert: Sell $ and buy £. The relevant rate is the Ask rate, namely, 1.5905 per £,
(Note: This is an indirect quote). Amount of £s received on conversion is 2,15,214.27
(3,42,298.29/1.5905).
Invest: £ 2,15,214.27 will be invested at 5% for 3 months and get £ 2,17,904.45
Settle: The liability of $3,42,298.29 at interest of 2.25 per cent quarter matures to
$3,50,000 receivable from customer.
Using forward rate, amount receivable is = 3,50,000 / 1.6140 = £2,16,852.54
Amount received through money market hedge = £2,17,904.45
Gain = 2,17,904.45 – 2,16,852.54 = £1,051.91
So, money market hedge is beneficial for the exporter
30.
End of Year ` `/USD
1 (1+ 0.08)
`46.00 x 47.77
(1+ 0.04)
2 (1+ 0.08)
`47.77 x 49.61
(1+ 0.04)
3 (1+ 0.08)
`49.61 x 51.52
(1+ 0.04)
4 (1+ 0.08)
`51.52 x 53.50
(1+ 0.04)
31. As per interest rate parity
1 + in A 
S1 = S 0  
 1 + in B 
 1 + (0.075)  3 
S1 = £0.7570  12 
 1 + (0.035)  3 
 12 

 1.01875 
= £0.7570  
 1.00875 
= £0.7570 × 1.0099 = £0.7645
= UK £0.7645 / US$
32. (i) The contract is to be cancelled on 30-10-2010 at the spot buying rate of US$ 1
= ` 41.5000
Less: Margin Money 0.075% =` 0.0311
= ` 41.4689 or ` 41.47
US$ 20,000 @ ` 41.47 = ` 8,29,400
US$ 20,000 @ ` 42.32 = ` 8,46,400
The difference in favour of the Bank/Cost to the importer ` 17,000
(ii) The Rate of New Forward Contract
Spot Selling Rate US$ 1 = ` 41.5200
Add: Premium @ 0.93% = ` 0.3861
= ` 41.9061
Add: Margin Money 0.20% = ` 0.0838
= ` 41.9899 or ` 41.99
33. (i) Forward Cover
1
3-month Forward Rate = = ` 0.5070/JY
1.9726
Accordingly, INR required for JY 5,00,000 (5,00,000 X ` 0.5070) ` 2,53,500
(ii) Option Cover
To purchase JY 5,00,000, XYZ shall enter into a Put Option @ JY 2.125/INR
 JY 5,00,000  ` 2,35,294
Accordingly, outflow in INR  
 2.125 
 INR 2,35,294  0.098  ` 11,815

Premium  
 1.9516 
` 2,47,109
Since outflow of cash is least in case of Option same should be opted for. Further if
price of INR goes above JY 2.125/INR the outflow shall further be reduced.

34. The company can hedge position by selling future contracts as it will receive amount from
outside.
$4,00,000
Number of Contracts = = 400 contracts
$1,000
Gain by trading in futures = (` 45 – ` 44.50) 4,00,000= ` 2,00,000

Net Inflow after after 3 months = ` 44.50 x ` 4,00,000+ 2,00,000 = ` 1,80,00,000
` 1,80,00,000
Effective Price realization = = ` 45 Per US$
$4,00,000
35. Option - I
$20 x 5000 = $ 1,00,000
Repayment in 3 months time = $1,00,000 x (1 + 0.10/4) = $ 1,02,500
3-months outright forward rate = ` 59.90/ ` 60.30
Repayment obligation in ` ($1,02,500 X ` 60.30) = ` 61,80,750
Option -II
Overdraft ($1,00,000 x ` 60.55) ` 60,55,000
Interest on Overdraft (` 60,55,000 x 0.14/4) ` 2,11,925
` 62,66,925
Option I should be preferred as it has lower outflow.
36. Forward Market Cover
Hedge the risk by buying Can$ in 1 and 3 months time will be:
July - 1010000 X 0.9301 = US $ 939401
Sept. - 705000 X 0.9356 = US $ 659598
Option Contracts
July Payment = 1010000/ 50,000 = 20.20
September Payment = 705000/ 50,000 = 14.10
Company would like to take out 20 contracts for July and 14 contracts for September
respectively. Therefore costs, if the options were exercised, will be:

July Sept.
Can $ US $ Can $ US $
Covered by Contracts 1000000 940000 700000 665000
Balance bought at spot rate 10000 9301 5000 4678
Option Costs:
Can $ 50000 x 20 x 0.0102 10200 ---
Can $ 50000 x 14 x 0.0164 --- 11480
Total cost in US $ of using Option Contract 959501 681158
Decision: As the firm is stated as risk averse and the money due to be paid is certai n, a
fixed forward contract, being the cheapest alternative in the both the cases, would be
recommended.
37. (i) Receipt under three proposals
(a) Proposal of Mr. Peter
€ 2.8 million
Invoicing in £ will produce = = £ 2.340 million
1.1965
(b) Proposal of Mr. Wilson
Forward Rate = €1.1970-0.0055 = 1.1915
€ 2.8 million
Using Forward Market hedge Sterling receipt would be = £
1.1915
2.35 million
(c) Proposal of Ms. Karen
The equivalent sterling of the order placed based on future price (€1.1943)
€ 2.8 million
= = £ 2,344,470 (rounded off)
1.1943
£2,344,470
Number of Contracts = = 37 Contracts (to the nearest whole number)
62,500
Thus, € amount hedged by future contract will be = 37  £62,500 = £23,12,500

Buy Future at €1.1943
Sell Future at €1.1873
€0.0070

Total loss on Future Contracts = 37  £62,500  €0.0070 =€16,188

After 6 months
Amount Received €28,00,000
Less: Loss on Future Contracts € 16,188
€ 27,83,812
Sterling Receipts
€ 27,83,812
On sale of € at spot = = £ 2.3446 million
1.1873
(ii) Proposal of option (b) is preferable because the option (a) & (c) produces least
receipts. Further, in case of proposal (a) there must be a doubt as to whether this
would be acceptable to German firm as it is described as a competitive market and
Zaz is moving into it first time.
38. £ Exposure
Since Columbus has a £ receipt (£ 138,000) and payment of (£ 480,000) maturing at the
same time i.e. 3 months, it can match them against each other leaving a net liability of £
342,000 to be hedged.
(i) Forward market hedge
Buy 3 months' forward contract accordingly, amount payable after 3 months will be
£ 342,000 / 0.9520 = US$ 359,244
(ii) Money market hedge
To pay £ after 3 months' Columbus shall requires to borrow in US$ and translate to £
and then deposit in £.
For payment of £ 342,000 in 3 months (@2.5% interest) amount required to be
deposited now (£ 342,000 ÷ 1.025) = £ 333,658
With spot rate of 0.9830 the US$ loan needed will be = US$ 339,429
Loan repayable after 3 months (@3.25% interest) will be = US$ 350,460
In this case the money market hedge is a cheaper option.
€ Receipt
Amount to be hedged = € 590,000

(i) Forward market hedge

Sell 4 months' forward contract accordingly, amount
receivable after 4 months will be (€ 590,000 x1.9510) = US$ 1,151,090
(ii) Money market hedge
For money market hedge Columbus shall borrow in
€ and then translate to US$ and deposit in US$
For receipt of € 590,000 in 4 months (@ 5.33% interest)

amount required to be borrowed now (€590,000 ÷ 1.0533) = € 560,144
With spot rate of 1.8890 the US$ deposit will be = US$ 1,058,113
Deposit amount will increase over 3 months
(@3.83% interest) will be = US$ 1,098,639
In this case, more will be received in US$ under the forward hedge.
39. (a) Forward contract: Dollar needed in 180 days = £3,00,000 x $ 1.96 = $5,88,000/ -
(b) Money market hedge: Borrow $, convert to £, invest £, repay $ loan in 180 days
Amount in £ to be invested = 3,00,000/1.045 = £ 2,87,081
Amount of $ needed to convert into £ = 2,87,081 x 2 = $ 5,74,162
Interest and principal on $ loan after 180 days = $5,74,162 x 1.055 = $ 6,05,741
(c) Call option:
Expected Prem. Exercise Total price Total price Prob. Pi pixi

Spot rate /unit Option per unit for
in 180 £3,00,000xi
days
1.91 0.04 No 1.95 5,85,000 0.25 1,46,250
1.95 0.04 No 1.99 5,97,000 0.60 3,58,200
2.05 0.04 Yes 2.01* 6,03,000 0.15 90,450
5,94,900
Add: Interest on Premium @ 5.5% (12,000 x 5.5%) 660
5,95,560
* ($1.97 + $0.04)

(d) No hedge option:
Expected Future Dollar needed Prob. Pi Pi xi

spot rate Xi
1.91 5,73,000 0.25 1,43,250
1.95 5,85,000 0.60 3,51,000
2.05 6,15,000 0.15 92,250
5,86,500
The probability distribution of outcomes for no hedge strategy appears to be most

preferable because least number of $ are needed under this option to arrange
£3,00,000.
40. In the given case, the exchange rates are indirect. These can be converted into direct rates
as follows:
Spot rate
1 1
GBP = to
USD1.5617 USD1.5673
USD = GBP 0.64033 - GBP 0.63804

6 months’ forward rate
1 1
GBP = to
USD1.5455 USD1.5609
USD = GBP 0.64704 - GBP 0.64066

Payoff in 3 alternatives
i. Forward Cover
Amount payable USD 3,64,897
Forward rate GBP 0.64704
Payable in GBP GBP 2,36,103
ii. Money market Cover

1 USD 3,56,867
PV @ 4.5% for 6 months i.e. = 0.9779951
1.0225
Spot rate purchase GBP 0.64033

Borrow GBP 3,56,867 x 0.64033 GBP 2,28,512

Interest for 6 months @ 7 % 7,998
-
Payable after 6 months GBP 2,36,510
iii. Currency options

Unit in Options contract GBP 12,500
Value in USD at strike rate of 1.70 (GBP 12,500 x 1.70) USD 21,250
Number of contracts USD 3,64,897/ USD 21,250 17.17
Exposure covered USD 21,250 x 17 USD 3,61,250
Exposure to be covered by Forward (USD 3,64,897 – USD USD 3,647
3,61,250)
Options premium 17 x GBP 12,500 x 0.096 USD 20,400
Premium in GBP (USD 20,400 x 0.64033) GBP 13,063
Total payment in currency option
Payment under option (17 x 12,500) GBP 2,12,500
Premium payable GBP 13,063
Payment for forward cover (USD 3,647 x 0.64704) GBP 2,360
GBP 2,27,923
Thus total payment in:
(i) Forward Cover 2,36,103 GBP

(ii) Money Market 2,36,510 GBP
(iii) Currency Option 2,27,923 GBP
The company should take currency option for hedging the risk.
Note: Even interest on Option Premium can also be considered in the above solution.
41. (i) Receipt under three proposals
(a) Invoicing in Sterling
€ 4 million
Invoicing in £ will produce = = £3398471
1.1770
(b) Use of Forward Contract
Forward Rate = €1.1770+0.0055 = 1.1825

€ 4 million
Using Forward Market hedge Sterling receipt would be
1.1825
= £ 3382664
(c) Use of Future Contract
The equivalent sterling of the order placed based on future price (€1.1760)
€ 4.00 million
= = £ 3401360
1.1760
£3401360
Number of Contracts = = 54 Contracts (to the nearest whole
62,500
number)
Thus, € amount hedged by future contract will be = 54  £62,500
= £3375000
Buy Future at €1.1760
Sell Future at €1.1785
€0.0025
Total profit on Future Contracts = 54  £62,500  €0.0025 = €8438
After 6 months
Amount Received € 4000000
Add: Profit on Future Contracts € 8438
€ 4008438
Sterling Receipts
€ 4008438
On sale of € at spot = = €3401305
1.1785
(ii) Proposal of option (c) is preferable because the option (a) & (b) produces least
receipts.
42. Option I (To finance the purchases by availing loan at 18% per annum):
Cost of equipment ` in lakhs
3400 lakh yen at `100 = 340 yen 1,000.00
Add: Interest at 4.5% I Quarter 45.00
Add: Interest at 4.5% II Quarter (on `1045 lakhs) 47.03
Total outflow in Rupees 1,092.03
Alternatively, interest may also be calculated on compounded basis, i.e.,
`1000 × [1.045]² `1092.03

Option II (To accept the offer from foreign branch):

Cost of letter of credit
At 1 % on 3400 lakhs yen at `100 = 340 yen ` 10.00 lakhs
Add: Interest for 2 Quarters ` 0.90 lakhs
(A) ` 10.90 lakhs
Payment at the end of 180 days:
Cost 3400.00 lakhs yen
Interest at 2% p.a. [3400 × 2/100 × 180/365] 33.53 lakhs yen
3433.53 lakhs yen
Conversion at `100 = 345 yen [3433.53 / 345 ×100] (B) ` 995.23 lakhs
Total Cost: (A) + (B) ` 1006.13 lakhs
Advise: Option 2 is cheaper by (1092.03 – 1006.13) lakh or ` 85.90 lakh. Hence, the offer
may be accepted.
43. (A) To cover payable and receivable in forward Market
Amount payable after 3 months $7,00,000
Thus Payable Amount (`) (A) ` 3,39,15,000
Amount receivable after 2 months $ 4,50,000
Thus Receivable Amount (`) (B) ` 2,20,05,000
Interest @ 12% p.a. for 1 month (C) ` 2,20,050
Net Amount Payable in (`) (A) – (B) – (C) ` 1,16,89,950
(B) Assuming that since the forward contract for receivable was already booked it shall
be cancelled if we lag the receivables. Accordingly, any profit/ loss on cancellation of
contract shall also be calculated and shall be adjusted as follows:
Amount Payable ($) $7,00,000
Amount receivable after 3 months $ 4,50,000
Net Amount payable $2,50,000
Applicable Rate ` 48.45
Amount payable in (`) (A) ` 1,21,12,500
Profit on cancellation of Forward cost ` 2,70,000
(48.90 – 48.30) × 4,50,000 (B)
Thus, net amount payable in (`) (A) + (B) ` 1,18,42,500

Since net payable amount is least in case of first option, hence the company should cover
payable and receivables in forward market.
Note: In the question it has not been clearly mentioned that whether quotes given for 2 and
3 months (in points terms) are premium points or direct quotes. Although above solution is
based on the assumption that these are direct quotes, but students can also consider them
as premium points and solve the question accordingly.
44. The contract would be cancelled at the one-month forward sale rate of ` 27.52.
`
Francs bought from customer under original forward contract at: 27.25
It is sold to him on cancellation at: 27.52
Net amount payable by customer per Franc 0.27
At ` 0.27 per Franc, exchange difference for CHF 10,000 is ` 2,700.
Loss to the Customer:
Exchange difference (Loss) ` 2,700
Note: The exchange commission and other service charges are ignored.
45. First the contract will be cancelled at TT Selling Rate
USD/ Rupee Spot Selling Rate ` 49.4455
Add: Premium for April ` 0.4200
` 49.8655
Add: Exchange Margin @ 0.10% ` 0.04987
` 49.91537 Or 49.9154
USD/ Sw. Fcs One Month Buying Rate Sw. Fcs. 1.5150
Sw. Fcs. Spot Selling Rate (`49.91537/1.5150) ` 32.9474
Rounded Off ` 32.9475
Bank buys Sw. Fcs. Under original contract ` 32.4000
Bank Sells under Cancellation ` 32.9475
Difference payable by customer ` 00.5475
Exchange difference of Sw. Fcs. 1,00,000 payable by customer ` 54,750
(Sw. Fcs. 1,00,000 x ` 0.5475)

46. The amount of EURO bought by selling US$

US$ 10,00,000 * EURO 1.4400 = EURO 14,40,000
The amount of EURO sold for buying USD 10,00,000 * 1.4450 = EURO 14,45,000
Net Loss in the Transaction = EURO 5,000
To acquire EURO 5,000 from the market @
(a) USD 1 = EURO 1.4400 &
(b) USD1 = INR 31.4500
Cross Currency buying rate of EUR/INR is ` 31.4500 / 1.440 i.e. ` 21.8403
Loss in the Transaction ` 21.8403 * 5000 = ` 1,09,201.50
Alternatively, if delivery to be affected then computation of loss shall be as follows:
EURO to be surrendered to acquire $ 10,00,000 = EURO 14,45,000
EURO to be received after selling $ 10,00,000 = EURO 14,40,000
Loss = EURO 5,000
To acquire EURO 5,000 from market @
US $ 1 = EURO 1.4400
US $ 1 = INR 31.45
31.45
Cross Currency = = ` 21.8403
1.440
Loss in Transaction (21.8403 x EURO 5,000) = ` 1,09,201.50
47. (i) To Buy 1 Million GBP Spot against CHF
1. First to Buy USD against CHF at the cheaper rate i.e. from Bank A.
1 USD = CHF 1.4655
2. Then to Buy GBP against USD at a cheaper rate i.e. from Bank B 1 GBP
= USD 1.7650
By applying chain rule Buying rate would be
1 GBP = 1.7650 * 1.4655 CHF
1 GBP = CHF 2.5866
Amount payable CHF 2.5866 Million or CHF 25,86,600
(ii) Spot rate Bid rate GBP 1 = CHF 1.4650 * 1.7645 = CHF 2.5850
Offer rate GBP 1 = CHF 1.4655 * 1.7660 = CHF 2.5881
GBP / USD 3 months swap points are at discount
Outright 3 Months forward rate GBP 1 = USD 1.7620 / 1.7640

USD / CHF 3 months swap points are at premium

Outright 3 Months forward rate USD 1 = CHF 1.4655 / 1.4665
Hence
Outright 3 Months forward rate GBP 1 = CHF 2.5822 / 2.5869
Spot rate GBP 1 = CHF 2.5850 / 2.5881
Therefore 3-month swap points are at discount of 28/12.
48. (i) Profit at current exchange rates
2400 [€ 500 × ` 51.50 – (S$ 800 × ` 27.25 + ` 1,000 + ` 1,500)]
2400 [` 25,750 - ` 24,300] = ` 34,80,000
Profit after change in exchange rates
2400[€500× ` 52 – (S$ 800 × ` 27.75 + ` 1000 + ` 1500)]
2400[` 26,000 - ` 24,700] = ` 31,20,000
LOSS DUE TO TRANSACTION EXPOSURE
` 34,80,000 – ` 31,20,000 = ` 3,60,000
(ii) Profit based on new exchange rates
2400[` 25,000 - (800 × ` 27.15 + ` 1,000 + ` 1,500)]
2400[` 25,000 - ` 24,220] = ` 18,72,000
Profit after change in exchange rates at the end of six months
2400 [` 25,000 - (800 × ` 27.75 + ` 1,000 + ` 1,500)]
2400 [`. 25,000 - ` 24,700] = ` 7,20,000
Decline in profit due to transaction exposure
` 18,72,000 - ` 7,20,000 = ` 11,52,000
` 25,000
Current price of each unit in € = = € 485.44
` 51.50
` 25,000
Price after change in Exch. Rate = = € 483.09
` 51.75
Change in Price due to change in Exch. Rate
€ 485.44 - € 483.09 = € 2.35 or (-) 0.48%
Price elasticity of demand = 1.5
Increase in demand due to fall in price 0.48 × 1.5 = 0.72%

Size of increased order = 2400 ×1.0072 = 2417 units
Profit = 2417 [ ` 25,000 – (800 × ` 27.75 + ` 1,000 + ` 1,500)]

= 2417 [ ` 25,000 - ` 24,700] = ` 7,25,100
Therefore, decrease in profit due to operating exposure ` 18,72,000 – ` 7,25,100
= ` 11,46,900
Alternatively, if it is assumed that Fixed Cost shall not be changed with change in
units then answer will be as follows:
Fixed Cost = 2400[` 1,000] = ` 24,00,000
Profit = 2417 [ ` 25,000 – (800 × ` 27.75 + ` 1,500)] – ` 24,00,000
= 2417 ( ` 1,300) – ` 24,00,000 = ` 7,42,100
Therefore, decrease in profit due to operating exposure ` 18,72,000 – ` 7,42,100
= ` 11,29,900
49. (i) If investment is made at London
Convert US$ 5,00,000 at Spot Rate (5,00,000/1.5390) = £ 3,24,886
Add: £ Interest for 3 months on £ 324,886 @ 5% =£ 4,061
= £ 3,28,947
Less: Amount Invested $ 5,00,000
Interest accrued thereon $ 5,000
= $ 5,05,000
Equivalent amount of £ required to pay the
above sum ($ 5,05,000/1.5430*) = £ 3,27,285
Arbitrage Profit =£ 1,662
(ii) If investment is made at New York
Gain $ 5,00,000 (8% - 4%) x 3/12 = $ 5,000
Equivalent amount in £ 3 months ($ 5,000/ 1.5475) £ 3,231
(iii) If investment is made at Frankfurt
Convert US$ 500,000 at Spot Rate (Cross Rate) 1.8260/1.5390= € 1.1865
Euro equivalent US$ 500,000 = € 5,93,250
Add: Interest for 3 months @ 3% =€ 4,449
= € 5,97,699

3 month Forward Rate of selling € (1/1.8150) = £ 0.5510

Sell € in Forward Market € 5,97,699 x £ 0.5510 = £ 3,29,332
Less: Amounted invested and interest thereon = £ 3,27,285
Arbitrage Profit =£ 2,047
Since out of three options the maximum profit is in case investment is made in New York.
Hence it should be opted.
* Due to conservative outlook.
50. (a) The following swap arrangement can be entered by Drilldip.
(i) Swap a US$ loan today at an agreed rate with any party to obtain Indian
Rupees (`) to make initial investment.
(ii) After one year swap back the Indian Rupees with US$ at the agreed rate.
In such case the company is exposed only on the profit earned from the
project.
(b) With the swap
Year 0 Year 1
(Million US$) (Million US$)
Buy ` 500 crore at spot rate of 1US$ = ` 50 (100.00) ----
Swap ` 500 crore back at agreed rate of ` 50 ---- 100.00
Sell ` 240 crore at 1US$ = ` 54 ---- 44.44
Interest on US$ loan @8% for one year ---- (8.00)
(100.00) 136.44
Net result is a net receipt of US$ 36.44 million.

Without the swap
Year 0 Year 1(Million

(Million US$) US$)
Buy ` 500 crore at spot rate of 1US$ = ` 50 (100.00) ----
Sell ` 740 crore at 1US$ = ` 54 ---- 137.04
Interest on US$ loan @8% for one year ---- (8.00)
(100.00) 129.04
Net result is a net receipt of US$ 29.04 million.

Decision: Since the net receipt is higher in swap option the company should opt for
the same.
51. Exchange Position:
Particulars Purchase Sw. Fcs. Sale Sw. Fcs.
Opening Balance Overbought 50,000
Bill on Zurich 80,000
Forward Sales – TT 60,000
Cancellation of Forward Contract 30,000
TT Sales 75,000
Draft on Zurich cancelled 30,000 —
1,60,000 1,65,000
Closing Balance Oversold 5,000 —
1,65,000 1,65,000
Cash Position (Nostro A/c)

Credit Debit
Opening balance credit 1,00,000 —
TT sales — 75,000
1,00,000 75,000
Closing balance (credit) — 25,000
1,00,000 1,00,000
The Bank has to buy spot TT Sw. Fcs. 5,000 to increase the balance in Nostro account to
Sw. Fcs. 30,000.
This would bring down the oversold position on Sw. Fcs. as Nil.
Since the bank requires an overbought position of Sw. Fcs. 10,000, it has to buy forward Sw.
Fcs. 10,000.

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9.

42 STRATEGIC FINANCIAL MANAGEMENT

TEST YOUR KNOWLEDGE

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Mumbai-London ` 74.3000 ` 74.3200

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The Bank wishes to retain an exchange margin of 0.125%

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You are required to evaluate the following options:

(i) What is the expected spot rate for 1.9.2009?

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Calculate the rate to be quoted to the importer by assuming an exchange margin of

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© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

3 months swap points : 35/25

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© The Institute of Chartered Accountants of India

Current spot and forward rates are as follows:

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(c) An option contract;

6 months forward premium 0.55-0.60 Euro Cents

© The Institute of Chartered Accountants of India

6 months future contract is currently trading at €1.1760/£

© The Institute of Chartered Accountants of India

Spot CHF 1 = ` 27.30 27.35

© The Institute of Chartered Accountants of India

47. You have following quotes from Bank A and Bank B:

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© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(1+0.12)(1+0.02) -1 =1.12X1.02 - 1 = 0.1424 i.e. 14.24%

(i) If spot rate decline by 2%

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£ receipt as per Spot Rate (Can $ 5,00,000/ Can$ 2.55) 1,96,078

(iii) If spot rate remains unchanged

5. (i) Swap Points for 2 months and 15 days

(ii) Foreign Exchange Rates for 20 th June 2016

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(iii) Annual Rate of Premium

Value of export at the time of export (` 0.6080 x ¥10,000,000) ` 60,80,000

Hedging of loss under Forward Cover

` Value of export at the time of export (` 0.6080 x ` 60,80,000

By taking forward cover loss is reduced to ` 54,000.

© The Institute of Chartered Accountants of India

(ii) Actual Rate of ¥ on August 2014 = ` 0.5977 (` 66.25/¥110.85)

Value of export at the time of export (` 0.6080 x ¥10,000,000) ` 60,80,000

The decision to take forward cover is still justified.

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Inflow Outflow Net Inflow Spread Net Exposure

© The Institute of Chartered Accountants of India

If the payment is made to supplier in 60 days the ` 57.10

(ii) Availing supplier’s offer of 90 days credit

Amount Payable USD 2,000,000

Alternative 1 is better as it entails lower cash outflow.